London’s housing unaffordability persists despite rate relief and flat market

 London property is getting cheaper, but that has resulted in limited relief for first-time homebuyers. On average, their mortgage payments are currently equivalent to 53% of their after-tax income. While that’s less of a burden than it was during the worst of the affordability crisis (64%, in the wake of the 2022-23 inflation surge and rate rises), first-time buyers had an easier burden through much of the 2010s.

Will the war in the Persian Gulf worsen affordability? Traders are betting that higher inflation stemming from a potential energy shock means no more Bank of England rate cuts, or even tightening — making mortgages more expensive. (The return of expats from Dubai and other low-tax jurisdictions could also strain supply.)

We’ve visualized 30-year housing metrics in western Europe’s biggest city for a historic perspective. Despite being one of the world’s more expensive housing markets, London homeownership was not only affordable but lucrative for many years.

In the 1990s and early 2000s, a booming finance sector drove strong wage gains. Before 2004, and despite mortgage rates that seem high two decades later, first-time buyers paid an average of less than 40% of their income to service their mortgages — a level that has never been seen again. The city’s success drove an influx of new residents from across the UK and abroad, including some of the world’s richest people. The result was property prices that sometimes climbed at a 20%-plus annual clip.

After the global financial crisis, dynamics changed. The financial sector’s greatest years were over but property prices kept going up — supported by ultra-low interest rates and substantial immigration. As our chart shows, this is when trends decoupled from the rest of the UK; from 2014 onwards, London become much less affordable than the rest of the country

The Brexit vote hit the finance sector and net migration. July 2016 was the last month that saw property prices increase at a 10%+ clip. And after years of outsized gains, property was expensive in absolute terms versus incomes, unlike the 1990s.

In recent years, tax changes have made the UK less attractive to the mobile global wealthy and imposed greater burdens on landlords. A “mansion tax” will also hit properties worth more than GBP 2 million. And amid political pressure to tighten immigration, fewer foreigners are moving to London.

The results can be seen in our second chart, which shows how price declines are concentrated in the capital’s most glamorous and expensive areas: west London neighbourhoods from Chelsea to Knightsbridge are seeing prices sink at a 10% annualized rate. (Outer-London districts known for working-class housing are still seeing gains.)

UK mortgage approvals have seen only a modest recovery in the recent rate-cut cycle, as our third chart shows. This is no doubt linked to the softer labor market, especially in the private sector. Remarkably, in the early 2000s, more than double the number of mortgages were being approved versus today’s levels (about 60,000 per month).

Our subsequent charts zoom out to national and regional trends covering house prices and related metrics, such as immigration and employment.

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